The following information was published by the North Carolina Bar Association
as a public service

Chapter 13 – “Wage Earners” Plan

Rather than seeking an immediate discharge of debts in
exchange for the sale of their non-exempt property under
Chapter 7, an individual with regular income may file a
Chapter 13 bankruptcy. In Chapter 13, the debtor proposes
a “plan” of repayment under which they offer to pay a fixed
monthly payment to a Chapter 13 trustee for a period of
time, typically from 36 to 60 months (3 to 5 years), beginning
when the case is filed. The trustee distributes these
funds to the creditors until the debtor has made all monthly
payments required under the plan. The plan typically
provides for the repayment of only a percentage of a
debtor’s debts. However, in certain circumstances such
as when the debtor has a high disposable income or a
substantial assets, a debtor may be required to pay all
debts in full. After the debtor completes all payments
required under the plan, most, if not all, debts remaining
unpaid are canceled or “discharged.”
During the Chapter 13 case, creditors generally are
“stayed” and cannot attempt to collect their debts
unless permission is given by the Bankruptcy Court. A
Chapter 13 filing can be used to stay foreclosure proceedings
and allow the debtor additional time to cure a
default on a residential mortgage through the Chapter
13 plan. Also, persons who are not eligible to file a
Chapter 7 bankruptcy because their annual income is
more than the annual median income such that they are
able to pay back a certain amount to unsecured creditors,
may be eligible to file Chapter 13 in order to
receive a discharge.
When a Chapter 13 case is filed, the debtor must file
with the court their plan of repayment along with the
standard bankruptcy petition, schedules and statement
of financial affairs. The plan states how much the
debtor proposes to pay the Chapter 13 trustee and the
creditors each month, and also states the proposed
length of the repayment plan. The plan must meet certain
legal guidelines to be approved by the bankruptcy
Once the petition is filed, the clerk of court schedules
a meeting of creditors, notifies the creditors listed
on the debtor’s schedules that the debtor has filed for
Chapter 13 bankruptcy protection, and instructs creditors
to file a “proof of claim,” which is an official form
the court mails to all scheduled creditors. Creditors
must file a proof of claim by the deadline set by the
court (approximately three months after the first meeting
of creditors) in order to participate in any distribution
of funds from the trustee. At the creditor’s meeting,
the trustee reviews the petition, schedules, statement
of financial affairs, and plan, and explains the
plan to the creditors attending. The creditors may
inquire about the location of collateral or how their
claim is to be paid within the Chapter 13 plan. If the
plan satisfies certain legal guidelines, the trustee will
request that the plan be reviewed and approved, or
“confirmed,” by the judge. If the trustee recommends that the debtor’s plan be
confirmed, the creditors will be
mailed a copy of the plan and will be given an opportunity
to object to the plan on the grounds that it does not
meet certain legal guidelines. In order for a plan to be
confirmed, the debtor must be current on all post-petition
child support and alimony payments and must have
filed all required tax returns, and the plan must satisfy
other legal requirements. If the plan is confirmed, the
trustee will disburse funds each month to the creditors
as set out in the plan.
If the debtor fails to make monthly payments to the
Chapter 13 trustee as required by the plan, the bankruptcy
case may be dismissed by the court upon the
request of the trustee or any creditor. If the debtor fails
to make monthly payments to a secured creditor as
required by the plan, that creditor may request that the
stay be lifted to allow it to repossess its collateral.
While the Chapter 13 plan is pending, the debtor may
also convert the case to a Chapter 7 straight bankruptcy
or may voluntarily dismiss the case.
When the Chapter 13 plan is successfully completed,
the debtor’s personal liability for debts listed on the
original schedules are discharged. As in Chapter 7
bankruptcy, certain debts including some long-term
debts, alimony, child support, and most student loans
are not dischargeable in Chapter 13. However, some
other debts which are not dischargeable in Chapter 7
may be discharged in Chapter 13. The debtor cannot
receive a discharge under Chapter 13 if the debtor
received a discharge in a prior Chapter 7, 11 or 12 case
filed within four years of the present case or if the
debtor received a discharge in a Chapter 13 case filed
within two years of the present case.

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DAVID R. HUFFMAN   Attorney and Counselor at Law